Pearls and Irritations

This is the latest monthly digest of articles, research reports, policy announcements and other material about housing stress/affordability and homelessness.

How to make housing more affordable  

The Grattan Institute submission to the current House of Representatives parliamentary inquiry into housing affordability and supply in Australia, authored by Grattan’s Brendan Coates and Tom Crowley, provides a sober review of the hard choices facing policy makers wishing to deal with Australia’s housing affordability crisis.

The submission includes abundant evidence about how much and in what ways housing affordability, housing stress and homelessness have deteriorated in recent decades and what the key drivers have been.

Along the way, it debunks some theories about key influences that are accepted as commonplace (eg that demand-side subsidies to first home buyers actually improve affordability). The submission provides a range of suggestions as to what federal and state governments can do to ameliorate conditions — ranging from the politically easy (but with only modest impact) to the politically difficult (but with much more meaningful impact).

A virtue of this submission is its attempt to assess where government subsidies and incentives are likely to achieve the greatest “bang for buck” impact, recognising that governments inevitably have to prioritise public spending.

The authors warn about the dangers of not adopting the hard political choices that are required to make a material positive difference, not least the very real risk that Australia will become a less equal (some might say “even less equal”) society.

Amongst Grattan’s key reform recommendations are: a state-driven but federally incentivised boost to the supply of new homes (Grattan estimates that an extra 50,000 homes per annum for a decade could result in Australian house prices and rents being up to 20 per cent lower than they would otherwise have been); reform to tax and welfare policies that distort demand for housing (eg a reduction in the capital gains tax discount from 50 per cent to 25 per cent, abolition of negative gearing and inclusion of owner-occupied housing in the age pension assets test); a substantial boost (say 40 per cent) to the rate of Commonwealth Rent Assistance (CRA) for those most needy, and an indexing of CRA to rents typically paid by welfare recipients, rather than to the CPI, which fails to account for the very substantial cost of accommodation; an increase in social housing which is tightly targeted to help Australians at serious risk of homelessness; and a cessation of government funded cash incentives or stamp duty concessions to first home buyers (on the basis that these measures can perversely worsen housing affordability).

Policy priests should tell young Australians the truth about homeownership and supply

This Sydney Morning Herald opinion piece by Jason Falinski, Liberal Party MP, offers some insight into his personal thinking about housing affordability, while he chairs the current House of Representatives inquiry into that vitally important subject.

Falinski is clearly aware of the seriousness of the predicament we find ourselves in, and he notes that homeownership for people under 40 is now lower than it was in 1947.

He lists among the “usual suspects”, as causes of that predicament: property speculators, net migration (at least pre-Covid), historically low interest rates and a tax system which has turned housing into a speculative asset.

While it is refreshing to see a Liberal MP acknowledge the negative impact on housing affordability of current tax settings, Falinski says his “usual suspects” are a problem only if you stop people from building more houses.

In sum, he views the fundamental root problem as one of inadequate supply of new housing, and blames the States for that, including what he sees as overly restrictive planning laws.  For a critical assessment of Jason Falinski’s opinion piece, see “Ritualised forms —– Jason Falinski and home affordability“.

Alan Kohler: Curbs on risky lending won’t solve the housing affordability crisis

Writing in The New Daily, Alan Kohler argues that any steps that the Australian Prudential Regulation Authority (APRA) —  at the urging of federal Treasurer Josh Frydenberg — takes to impose tighter “macroprudential” controls (to take some heat out of a massively overheated housing market) will provide only a short-term reprieve for would be homeowners, and amount to no more than “macroprudential fiddling”.

He notes that APRA is responsible for the health of the banking system (and its fellow financial regulator, the Reserve Bank, for inflation and unemployment), but neither is responsible for housing affordability.

That is, as Kohler puts it, “not their department”.

He says APRA could significantly cool housing demand by lowering the loan to value ratio (LVR) imposed on banks, thereby dampening banks’ excessively liberal lending policies that result in some borrowers taking on excessive debt and thereby exposing them (and for that matter the entire financial system) to considerable risk if interest rates head up even by only a few per cent.

He reminds us that interest rates averaged 7 per cent between 1999 and 2012 (peaking at 17 per cent in 1989) compared to the current average of 2.82 per cent, and predicts “the Australian household sector would go entirely broke if interest rates went back to where they were between 1999 and 2012”.

Kohler concludes that the only real solution to the housing affordability crisis is a concerted effort to “increase housing supply through easier zoning and transport infrastructure spending, plus the removal of tax breaks like negative gearing and discounted capital gains tax to reduce demand”.

NSW targets capital gains as property tax fight erupts

Australian Financial Review economics editor John Kehoe analyses the recent scrap between the NSW Liberal government and its federal counterpart over the issue of tax breaks favouring investors in residential property.

In a submission to the current House of Representatives enquiry into housing affordability and supply, NSW Planning Minister Rob Stokes has suggested that the federal government should review taxation settings, including the 50 per cent capital gains tax (CGT) discount for properties held for over 12 months and consider reforms to ensure an appropriate balance between residential property investors and owner-occupiers — arguing that this would reduce “speculative pressures in the housing market”.

Responding to that submission, the chair of the enquiry Jason Falinski MP said the real problem is overly restrictive state and local government planning and zoning rules, which crimp the supply of new homes.

He called the NSW submission “very disappointing”.

Kehoe cites the RBA as agreeing that increased supply of new dwellings would help control price growth but would not be enough to offset the greater spending power coming from low interest rates.

He quotes the RBA as saying that in combination with the concessional treatment of capital gains, negative gearing creates an incentive for leveraged investment in property and adds to demand for housing.

And he goes on to record leading independent economist Saul Eslake (in his submission to the current parliamentary inquiry) as supportive of the NSW government’s submission concerning the CGT discount, describing it as “one of the dumbest tax breaks in history” — one which “turned us into a nation of property speculators” and has played out well for those lucky enough to already be invested in the residential market.

See also “NSW takes aim at capital gains tax breaks for property investors in bid to help first-home buyers“.

Exploding the myth that increasing supply will fix Sydney’s soaring house prices

In an opinion piece in The Age, respected Sydney University academic Professor Nicole Gurran challenges the argument that increasing supply is a “fix” for the explosion in Sydney’s housing prices.

She says so-called supply side “splainers” fail to understand that the housing market does not operate like markets which follow typical rules around imbalances in supply and demand (ie. markets where consumers can readily switch from one consumer product to another, in response to such imbalances).

She illustrates her point by observing how, despite population growth having taken a dive since the onset of the current pandemic (due to a dramatic fall from the previous high annual net overseas migration into Australia) — with a consequent reduction in demand for accommodation — we have seen a stratospheric rise in house prices “propelled by low interest rates and government grants”.

And she notes “record numbers of new homes have been delivered over the past five years.

In Greater Sydney, housing completions have more than doubled over the past decade…”.

Gurran believes that “the real housing affordability pressures experienced by low-income renters and aspiring homeowners will never be addressed by the private market alone…”.

She acknowledges that we do need new housing supply as our population grows and changes (describing such new supply as “critical”), but says new supply alone is not enough.

“To address affordability”, she says, “we need to reboot the public sector involvement in housing delivery which amounted to over 10 per cent of new homes in the mid-1990s.”

Housing affordability collapses despite record low interest rates  

Sydney Morning Herald senior economics correspondent Shane Wright says “housing affordability across Sydney has collapsed to its lowest level in at least a decade and is on track for the same point in Melbourne as the benefits of record low interest rates are overwhelmed by soaring property prices and stagnant wages growth”.

These observations are based on recently released analysis by Moody’s Investor Service showing that Sydney’s median house price now stands at $1.3 million, meaning that a household with an annual income of $135,000 will spend more than 45 per cent of it servicing their new mortgage — compared to 36 per cent as recently as February.

Despite the RBA having signalled that it would not lift interest rates until 2024, the market does not seem to believe this, and Wright notes: “So large are current new mortgages, Moody’s estimates that a quarter percentage point increase in interest rates would translate into a 0.7 per cent increase in the share of a household’s income needed to service their loans.”

He goes on to cite Moody’s prediction that income growth will not materially offset housing price gains over the rest of 2021 and into 2022.

See also “Housing affordability crisis deepens, with worse to come” and “Sydney’s housing affordability nearly the worst in a decade“.

Vested interest: How the home-ownership game is rigged

Sydney Morning Herald economics editor Ross Gittins has a bleak view of the prospect of reversing the steady decline in home ownership or in housing affordability generally.

He says the home ownership rate, now standing at 65.5 per cent, is its lowest since 1954, at the same time observing that “Australians are obsessed by the desire to own their home, and then gradually turn it into their mansion”.

Gittins says the main reason house prices have soared during the pandemic is that the RBA has acted to protect the economy by cutting official interest rates virtually to zero, and we’ve responded the way we always do to lower rates.

The consequence, he points out, is that “much of the seeming benefit of lower interest rates ends up as higher house prices — to the benefit of existing homeowners and the expense of young aspiring first-home buyers”.

He concludes: “The rules of the home-ownership game are rigged in favour of existing homeowners. That’s because they far outnumber aspiring homeowners.  And they’re not willing to give up their tax and other privileges to help the younger generation. Except, of course, their own kids.”

A painful irony for those whose parents cannot afford to help their kids gain a foothold in the housing market.

Building more houses quickly is harder than it looks. Australia hasn’t done it in decades

Ehsan Gharaie, Associate Professor of project management at RMIT and his PhD candidate colleague at RMIT Ali Zolghadr point to the apparent disconnect between new housing commencements and new housing completions.

They say that ABS figures show that even after an enormous jump in construction activity between June quarter 2020 and the equivalent period in 2021, and all through previous jumps in construction, the number of houses completed each quarter has changed little.

Based on their research, they say that every time the number of houses under construction has peaked, completion times have blown out.

The reason? “Houses are not built on production lines. Unlike other universal purchases such as cars, each house is built individually. And the method hasn’t changed much in 100 years… The method is hard to scale up, and unresponsive to demands for speed. It is ripe for innovations such as offsite construction and prefabrication…”